The Decline of Corporate Income Tax Revenues

PDF of this report (18pp.)

By Joel Friedman

Revised October 24, 2003

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Summary

A weak economy, new tax breaks, and aggressive tax sheltering have pushed corporate income tax receipts down to historically low levels, both relative to the size of the economy and as a share of total federal revenues.  According to the most recent budget projections of the Congressional Budget Office, corporate revenues will remain at historically low levels even after the economy recovers, and even if the large new corporate tax breaks enacted in 2002 and 2003 are allowed to expire on schedule.

Deficits over the next decade are now projected to be enormous in size.  A joint analysis by the Center on Budget and Policy Priorities, the Concord Coalition, and the Committee for Economic Development projects deficits totaling $5 trillion through 2013.  An analysis by Brookings economists reaches a very similar conclusion, while Goldman Sachs projects deficits totaling $5.5 trillion.[1]  Despite the deteriorating fiscal outlook and the historically low corporate revenue collections we already face, Congress nonetheless seems poised to shower more tax breaks on corporations that would cause deficits to grow substantially larger over time (see box).

  • Treasury Department figures show that actual corporate income tax revenues fell to $132 billion in 2003, down 36 percent from $207 billion in 2000.
  • As a result of these low levels, corporate revenues in 2003 represented only 1.2 percent of the Gross Domestic Product (the basic measure of the size of the economy), the lowest level since 1983, the year in which corporate receipts plummeted to levels last seen in the 1930s.
  • Corporate revenues represented only 7.4 percent of all federal tax receipts in 2003. With the exception of 1983, this represents the lowest level on record (these data go back to 1934).

Corporate Tax Cuts on the Congressional Agenda

Pressure to cut taxes for corporations is likely to intensify this fall as Congress takes action to comply with a recent ruling by the World Trade Organization that tax subsidies provided to U.S. exporters violate trade agreements.  The WTO authorized European countries to impose sanctions of $4 billion a year on U.S. exports if these subsidies are not eliminated.

Repealing these export subsidies would raise about $50 billion in revenues over ten years, which creates an opportunity for supporters of corporate tax cuts to push for at least that much in new corporate tax breaks.  Indeed, both the measure that the Senate Finance Committee adopted on October 1 (S. 1637) and the measure introduced by House Ways and Means Chairman Bill Thomas (H.R. 2896) would provide significantly more than $50 billion in new tax cuts to corporations.

The Thomas bill would provide corporate tax breaks totaling $200 billion over ten years while offering revenue-raising offsets of only $72 billion.  As a result, the package would cost $128 billion over the decade.  Moreover, the measure includes a number of tax cuts that artificially expire before the end of the ten-year period; as a result, the true cost of the bill, assuming extension of these tax breaks (many of which, such as the popular research and experimentation tax credit, are sure to be extended) is substantially higher than the reported $128 billion.

The package adopted by the Senate Finance Committee on October 1 is ostensibly deficit-neutral, with revenue-raising provisions in the bill that appear to equal the cost of the bill’s new corporate tax breaks over the 2004-2013 period.  But the bill’s appearance of revenue neutrality rests upon gimmicks.  Several of its new tax cuts do not become fully effective until late in the decade, which makes their cost in the ten-year budget window much smaller than the cost of continuing these tax cuts indefinitely.  The result is a serious mismatch over time between the revenue raised by the “offsets” in the bill and the revenue lost by the tax cuts.  This can be seen in Joint Tax Committee figures showing that the measure would lose more than $9 billion in the second half of the ten-year period and lose more than $4 billion in 2013 alone.  Over the long run, the bill is not deficit neutral and would produce sizeable revenue losses, thereby enlarging long-term deficits that already are frightening in size.

Concerns about the corporate tax-cut measures under consideration in both the House and Senate extend beyond their high cost.  Although a detailed analysis of these measures is beyond the scope of this paper, both bills would further erode the corporate income tax base and potentially distort the allocation of economic resources.  In an attempt to satisfy competing business interests, these bills offer dozens of targeted tax breaks for U.S. manufacturers and U.S. multinational corporations; tax breaks targeted in this manner can create economic inefficiencies by favoring certain activities over others that may be economically superior but less profitable once the tax break is factored in.  Both measures also provide a temporary tax reduction for the repatriation of overseas profits.  This type of tax amnesty rewards firms that have sheltered funds overseas and potentially encourages more sheltering, as multinationals assume that the tax amnesty will be repeated in the future.  Further, provisions in the Thomas bill would weaken current anti-abuse rules, creating new opportunities for U.S. multinationals to shelter profits overseas.

Corporate income tax revenues are sensitive to economic conditions, and the recent slowdown in the economy has played a significant role in the collapse of corporate revenues.  But the economy explains only part of the decline.  Tax cuts for corporations enacted over the past few years have also contributed significantly.  Based on Joint Committee on Taxation estimates, provisions enacted in 2002 and 2003 reduced taxes for businesses by over $50 billion in 2003, and corporations are by far the largest beneficiaries of these tax breaks.

Corporate revenues are further diminished by aggressive tax avoidance strategies, including the sheltering of corporate profits overseas.  No precise estimates of the extent of these tax shelter activities exist.  In testimony before the Senate Finance Committee in March 2000, the Joint Committee on Taxation stated that “the data are not sufficiently refined to provide a reliable measure of corporate tax shelter activity.”  Using the evidence that is available, however, the Joint Committee concluded that “there is a corporate tax shelter problem” and that “the problem is becoming widespread and significant.”[2]  Similarly, former IRS Commissioner Charles Rossotti identified abusive corporate tax shelters as "one of the most serious and current compliance problem areas." [3]  Internal IRS studies on tax sheltering, recently disclosed by the General Accounting Office, indicate that “tens of billions of dollars of taxes are being improperly avoided and the potential for the proliferation of abusive tax shelters is strong.”[4]

Long-term Decline in Corporate Revenues

Other recent analyses have examined the stunning deterioration in the budget outlook, as well as the large, persistent deficits that now loom as far as the eye can see and that will swell further as the baby boom generation retires.  In this analysis, we seek to provide context for the upcoming Congressional debate on corporate tax cuts, by examining trends in corporate tax revenues over recent decades.  The analysis includes the following findings:

  • Although taxes paid by corporations, measured as a share of the economy, rose modestly during the boom years of the 1990s, they remained sharply lower even in the boom years than in previous decades.  According to OMB historical data, corporate taxes averaged 2 percent of GDP in the 1990s.  That represented only about two-fifths of their share of GDP in the 1950s, half of their share in the 1960s, and three-quarters of their share in the 1970s.
  • The share that corporate tax revenues comprise of total federal tax revenues also has collapsed, falling from an average of 28 percent of federal revenues in the 1950s and 21 percent in the 1960s to an average of about 10 percent since the 1980s.
  • The effective corporate tax rate — that is, the percentage of corporate profits that is paid in federal corporate income taxes — has followed a similar pattern.  During the 1990s, corporations as a group paid an average of 25.3 percent of their profits in federal corporate income taxes, according to new Congressional Research Service estimates.  By contrast, they paid more than 49 percent in the 1950s, 38 percent in the 1960s, and 33 percent in the 1970s.
  • Corporate income tax revenues are lower in the United States than in most European countries.  According to data from the Organization for Economic Cooperation and Development, total federal and state corporate income tax revenues in the United States in 2000, measured as a share of the economy, were about one-quarter less than the average for other OECD member countries.  Thirty-five years ago, the opposite was true — corporations in the United States bore a heavier burden than their European counterparts.

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